Pricol limited – OEM automotive

Q2 FY25 numbers are okay, and a tad better than what they seem at first sight.

1. Sales have grown both 8 % QoQ and 16 % YoY basis. Q2 is traditionally a strong quarter for the company. Management said they have registered a “higher than market growth”.

2. But gross margin has shown a decline and 30.04 % is slightly lower than past several quarters. Management said this is “mainly due to product mix”. Part of the reason is export margins are significantly higher, but they are muted currently. Exports were 6.5 % of the sales this quarter but they were 9 % last year.

3. As a consequence, the operating margin has also declined QoQ from 13 % to 11.5 % but is slightly higher than Q2 of last year. Absolute operating profits fell slightly QoQ. On a YoY basis, numbers look good as Q4 of FY24 had shown a big jump in profitability.

4. Interestingly, cash position looks to have worsened at first glance - CFO down from Rs.134 crore last year to Rs.64 crore this time, and cash / bank position lower in the Balance Sheet. Receivables are up by almost Rs.100 crore. But the management said that is because the company has not resorted to factoring on account of improved cash position. This is an important point to remember while analyzing any Cash Flow Statement. Overall receivable days are same as normal. The company gives credit period of 30 to 45 days for domestic sales and 60 days for imports.

5. Borrowings have declined, and long-term borrowing is nil. It may be recalled that CRISIL upgraded the company credit rating recently and said, “The company is expected to generate healthy cash accrual of over Rs 275 crore on an annual basis over the medium term, which will suffice to meet its yearly capex needs of Rs 150-200 crore, leading to continued healthy debt metrics.”

6. In a surprise announcement, the management said they are “exploring inorganic opportunities in the railway and defence sector which will have higher margins”. Some announcement is expected shortly, and the acquisition size will be a “two digit” number. Besides this, the company is also looking at other acquisitions and may raise debt upto Rs.300 crore to fund the same.

7. The management also read out a long list of capex projects, which included both greenfield and brownfield expansions.

Among other things, the management said

1. EV adoption will be slow, not as fast as people expect

2. Not bullish about BMS, not considering much of BMS revenues in any of the projections

3. PV contribution to the revenues was 9 to 10 %

But the management also cautioned that demand is muted in the 2W industry currently, Q3 will be even more muted.

(Disc.: Invested, E & OE)